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China’s Efforts to Stem Capital Outflows Are Starting to Pay Off

China’s campaign to stop cash flooding out of the country is showing some success.

For the first time since the yuan’s devaluation in August 2015, Chinese banks last month registered net inflows under the capital account, according to cross-border payments figures released last Thursday by the currency regulator. The yuan, which plunged last year by the most in two decades, is now heading for its biggest monthly advance against the dollar since March.

While the $13.5 billion influx recorded for December is dwarfed by the estimated $1.2 trillion that’s left China since the 2015 devaluation, the situation may be at a turning point, according to Oversea-Chinese Banking Corp. Efforts to stem the outflow tide -- from tighter restrictions on companies’ outbound investments to extra hurdles to transferring money overseas -- appear to be working. President Donald Trump has also voiced concern over the strength of the greenback, which has lost more than 1 percent to the yuan this year.

“This could be a turning point for China’s capital flows,” said Tommy Xie, an economist at OCBC in Singapore. “This year, the government will keep its capital controls tight, while long-term foreign investors will buy more onshore assets due to higher returns.”

China is stepping up measures to stabilize the yuan and stem outflows after the currency plunged by the most in more than two decades last year. Regulators have tightened capital controls and mopped up offshore supply of the yuan to deter bearish bets on the currency. China was reported in November to be planning to bar most foreign investments of $10 billion or more, and authorities have also asked banks to report capital account transactions involving foreign currency of above $5 million, people familiar with the request have said, asking not to be identified because the information is private.

The return of inflows in December came amid a 48 percent jump in foreign investment in Chinese securities to an 18-month high of $11.7 billion, according to the State Administration of Foreign Exchange. The turnaround was also driven by a drop-off in outbound direct deals by Chinese companies and profit repatriation by overseas firms. Outflows via these channels were $21.6 billion last month, half what they were in November, SAFE said.

The greenback has given up some ground since U.S. Treasury Secretary nominee Steven Mnuchin told lawmakers an “excessively strong dollar” could have a negative short-term effect on the economy. Trump said in a Wall Street Journal interview last week that the dollar was already “too strong” in part because China holds down its currency.

Regulators would likely be pleased with the revival in inflows, said Harrison Hu, chief greater China economist at Royal Bank of Scotland Group Plc. in Singapore.

“China’s capital flows will likely improve even further this month,” Hu said. “The market should be prepared for upside surprises in cross-border flows and the yuan this year.”